2016/30 | LEM Working Paper Series | ||||||||||||||||
Real Estate and the Great Crisis: Lessons for Macro-Prudential Policy |
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John V. Duca, Lilit Popoyan and Susan M. Wachter |
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Keywords | |||||||||||||||||
Macro-prudential policy, nancial crises, credit crunches, real estate
bubbles, regulatory arbitrage, risk-taking
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JEL Classifications | |||||||||||||||||
G28, E3, R31, R33, R38
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Abstract | |||||||||||||||||
From a broad macro-financial structure perspective, overly easy credit
conditions gave rise to house price booms and busts in several
advanced economies (e.g., Ireland, Spain, and the U.S.), and, more
specifically in the U.S., an underpricing of risk made possible by
regulatory arbitrage and shadow financing fueled the credit and twin
real estate bubbles of the mid-2000s. Across countries and over time
bubbles have been particularly acute in real estate markets reflecting
not only the relatively inelastic supply of land and thin trading of
real estate, but also the amplification of shocks via backward-looking
price expectations and the funding of consumption off distorted and
elevated prices. The macro-prudential lessons from the Great Crisis
highlight the need to prevent the build-up of excess real estate
financing and limit the amplification and correlation of real estate
risks. And progress has been made in each of these areas through
imposing tougher or new restrictions on the choice sets of lenders or
of borrowers, with particulars varying across advanced
economies. While regulatory reform of banking is going forward,
significant challenges remain especially in dealing with correlated
risks associated with securitization.
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